States Are Crossing Borders to Collect Taxes

The States are getting desperate. New York & Connecticut (among others) are gearing up to enforce a tax law usually reserved for the rich and famous. Athletes, for example, make millions upon millions of dollars and their travel schedules are well known. Therefore, when they travel to another state to play, that particular state taxes a prorated share of their annual income. Due to the financial crisis and state budgets crises, now the Joe-the-Plumbers of the world can expect to be taxed just like the Joe Mauers of the world (who just signed the richest contract for a catcher in MLB history).

Anyone who crosses a state border for work — to make a sales call, say, or meet with a client or do a road show on Wall Street — probably owes income taxes in that state.

If you live in Boston but spend one out of 250 workdays this year in New York, you owe New York income taxes on 1/250th of your salary. And vice versa if you are a New Yorker visiting Boston — or Anywheresville, for that matter — for business.

Such laws have been on the books for decades, and they vary by state. But it is only recently, accountants and tax lawyers say, that many states appear to have picked up enforcement, expanding it beyond the wealthiest celebrities and athletes.

“The states are all hungry for revenue,” said Alan Clavette, an accountant in Newtown, Conn. “We are certainly seeing states like New York and Connecticut looking more and more for executives and everyday taxpayers who may be spending time across the border.”

Former NY State tax commissioner James W. Wetzler said aside from imposing this tax on the rich, it was largely a “don’t ask don’t tell” type of deal. The amount of time and recourses required to go after the lawyers or traveling salesmen simply did not warrant the expense. However, governing bodies now have access to tax data they never had before and this all appears to be changing:

But now states have greater access to data warehouses that help them better track taxes owed. Real estate transactions, federal data from the Internal Revenue Service, commercial license plates, traffic tickets, bids for government construction projects — all this information, newly digitized and dumped into a computer system, can help states find tax scofflaws.

“We’re sort of getting into ‘1984’ land here,” said Kenneth T. Zemsky, an accountant and partner at Ernst & Young. “A lot of the reason they went after athletes and entertainers is that they couldn’t find the other people. Now they’re able to get those people, too.”

Failure to file in accordance with this tax law can have serious consequences. Most states take multiple years to investigate and come to final determinations on returns that they audit. Depending on the amount they claim you owe, it could lead to garnishment of wages and/or future refunds. Also, penalties and interest continue to accrue for the entire period of non-payment. Depending on the state, the penalties and interest could be greater than the amount of taxes.

It appears that the states best enforcement tactic may be requiring employers to withhold additional state taxes from employee’s paychecks:

State auditors may not be able to monitor every border-crossing, but with corporate payroll managers as their enforcers, they don’t need to…In some cases auditors check to see if, say, an employee who was reimbursed for airfare to California also had California income taxes withheld from his paycheck. If not, the company can be fined.

The bigger burden associated with distributing your taxes to more state governments is the administrative effort it requires, for both employee and employer. Many states require filing a return for a single day’s work. For peripatetic workers like salesmen or consultants, filing a pile of additional state tax returns can become prohibitively expensive, not to mention frustrating.

In other words, this all boils down to enforcement. Even with all the new technology at the state’s fingertips, they may not have enough to gain with a full court press on this issue. The future will surely reveal which states are the most aggressive. The most aggressive states stand the most to gain, and reciprocally, they are the states that are more desperate to close their budget gaps. The state of New York appears to be desperate, and thus we would not recommend that NY taxpayers take a “wait-and-see” approach. If recent history is any guide, NY State will tax first and ask questions later. If you think you will be affected by the enforcement of this tax law, please contact us. An experienced R&G Brenner tax consultant is ready to guide and advise you through this process.